An Overview For Your Business
To accept credit card payments at your business, you’ll need to sign up for merchant services and negotiate a contract with a payment processor (also called merchant service providers and credit card processors). This contract, often called a “merchant processing agreement,” will determine your pricing model, the terms you’ll abide by, and the types of services you’ll receive.
The credit card networks like Visa and Mastercard will set your base costs (called interchange fees and assessments), and those can’t change, but your payment processor decides what you’ll pay overall through its markups and other service fees.
So your choice of a credit card processor and the contract you negotiate are really the biggest factors in whether or not your business gets screwed, and it pays to understand what to expect. This guide on what to look for in a payment processor can help get you started.
What is a Payment Processor?
Your payment processor is your business’s link to the rest of the credit card payment industry, and it performs two basic but essential functions:
- Your payment processor enables your business to process credit card payments by transferring transaction information back and forth between you (the merchant) and the other key players involved in the credit card payment process; and
- Your payment processor provides your business with access to a merchant account (through an acquiring bank), which serves to hold and eventually transfer the relevant funds to your business’s deposit account.
A payment processor, in other words, is a go-between—a “middle-man”—that manages and facilitates the merchant’s end of the card payment industry.
This includes providing your business with a merchant service agreement that defines your general payment model, fees for additional services, and contract terms you’ll abide by.
It also usually includes providing the necessary processing equipment or software for your business (traditional credit card terminals, mobile swipers, virtual terminals, online payment gateways, and so on).
Payment processors are known by many names—including “merchant service providers,” “credit card processors,” or more simply “credit card processing companies”—but these terms all mean pretty much the same thing: a company that enables buyers and sellers to process credit card payments.
And, of course, your business can’t get along without one.
Types of Payment Processors
Is there more than one type of payment processor?
Yes. Payment processors generally come in two forms: payment aggregators and traditional merchant account providers.
- Payment Aggregators
Of the two types, payment aggregators are probably the most well known. Famous companies like Square, Stripe, and PayPal are payment aggregators—which simply means they use “aggregated” merchant accounts to process card payments for multiple businesses at the same time (“aggregated,” if you’re wondering, means a “group or cluster”).
So, if your business signs up with a payment aggregator, you won’t have a merchant account of your own. You’ll use your payment processor’s merchant account instead.
- Traditional Merchant Account Providers
Traditional merchant account providers include companies like First Data and TSYS, and they’re distinguished mainly by their ability to provide your business with access to a dedicated merchant account.
A dedicated merchant account (or simply a merchant account) is exactly what it sounds like: a merchant account that processes card payments for your business alone.
It isn’t always easy to tell immediately if a payment processor is a traditional merchant account provider of a payment aggregator (say, when you’re searching for companies online), but you’ll figure it out with just a little digging.
Probably the clearest sign is the nature of the application process. If a payment processor presents itself as an easy, immediate solution to your credit card processing needs (as with Square and PayPal), that typically means it is a payment aggregator that will sign you up without an extensive vetting process.
If the payment processor’s application process is long and involved—asking for extensive information about your business history, credit history, sales volume, average ticket, and business model—then it is almost surely a traditional merchant account provider.
Traditional Processors vs. Payment Aggregators
Which will be better for your business: a traditional merchant account provider or an aggregated merchant account? There’s no one answer. So much depends on your type of business, its size, its sales volume, its average ticket, and the services and fees you can afford.
But the main advantages and disadvantages of both options are fairly clear:
- Applying & Qualifying
Payment aggregators aren’t particularly choosy. It’s usually easy to get your business approved, the application process is typically simple, and you can often get started accepting credit card payments right away.
By contrast, not every business will easily qualify for a dedicated merchant account with a traditional merchant account provider. The payment processor will closely examine your business’s ownership, history, and finances to make sure your business doesn’t pose too high of a risk, and the application itself is complicated, long, and tedious. If time is truly of the essence, you’re probably best going with a payment aggregator instead.
- Account Holds
Payment aggregators process funds for numerous business through the same merchant accounts, so other business’s actions (such as fraudulent activity) can cause a payment processor to put a hold on the account.
This won’t be a problem if you have a dedicated merchant account, so long as your business isn’t involved in suspicious activities of its own. If you want the safest, most reliable account for processing credit card payments, a dedicated merchant account with a traditional provider is the choice for you.
In general, your payment processing contract will control how quickly you receive your funds. Funding delays of 48 hours or longer are fairly common with payment aggregators.
Delayed funding is also possible with a dedicated merchant account, but you’re still more likely to get a contract that guarantees 1-day funding.
- Rates & Fees
Payment aggregators tend to have low start-up costs and often provide inexpensive equipment options. But they also tend to use flat-rice pricing models, which charges a consistent fee (say, 2.75% of each transaction) that stays the same regardless of the payment’s size. On the surface, flat-rate pricing looks cheap and simple, but you’ll end up paying far more in fees if your sales go up. Some payment aggregators also put annoying limits on the number of credit card transactions your business can process.
When you have a dedicated merchant account, you’ll have higher start-up costs, but you’ll also have more pricing options (including tiered plans and interchange-plus plans). You’ll need a dedicated merchant account to qualify for an interchange-plus pricing plan, for instance, and this is the most transparent type of credit card payment model out there. Interchange-plus pricing also tends to be less expensive in the long-run if your business processes a lot of credit card transactions.
In a nutshell, then, you can usually count on payment aggregators to get you started quickly, to charge simple (if potentially misleading) fees, and to put up fewer roadblocks in your way. If your goal is to start accepting credit card payments as quickly as possible, a payment aggregator might be the route to take.
But if you want more pricing options, more reliable funding, and lower transaction fees as your business grows, it’s probably in your best interest to go through the lengthier process of negotiating a contract with a traditional merchant account provider instead.
Ultimately, this is the approach we recommend for most businesses large and small.
Payment Processors: What to Look For
However, there’s more to choosing the right payment processor than deciding between a traditional merchant account provider and a payment aggregator.
There are also subtler issues—comparing each company’s data security, customer support, your overall costs, and your equipment needs—that are just as important in the end.
Here’s a quick run-down of the things to look for when comparing the available credit card processing companies:
Some payment processors will lock you into long-term contracts (usually around 3 years), complete with sizable early termination fees. Other companies will allow you to essentially pay as you go, will offer short-term contracts, or won’t have a contract at all (beyond terms of service).
We aren’t going to suggest that long-term contracts are necessarily a bad thing in all circumstances because they aren’t. If a payment processor provides general terms, equipment, payment options, and processing rates that are a good match for your type of business—and if you know you’re going to be in it for the long haul—a long-term contract is simply a form of mutual security.
However, if you’re just starting out accepting credit card payments and you’re essentially testing the waters, you probably want to avoid getting into a contract you can’t get out of. This is particularly true for new businesses, very small businesses, occasional sellers and hobbyists.
Fortunately, numerous companies—including well-known payment aggregators like Square and Stripe—don’t require applicants to sign long-term contracts.
- Processing Rates & Fees
Credit cards are a form of payment you have to pay for, and the range of credit card processing fees (and payment models) vary from payment processor to payment processor.
Credit card processing fees are complicated, of course, but the most important thing to keep in mind is that your payment processor’s fees and pricing model should be a good match for your type of business.
Processors that specialize in mobile credit card processing, for instance, aren’t necessarily a good match for every brick-and-mortar store, and the high start-up fees of most traditional merchant account providers are rarely suitable for small-time merchants with fluctuating monthly sales.
- Payment Options & Flexibility
Your payment processor should be able to accommodate every payment option your business needs, whether that’s basic storefront card processing for every major card brand, mobile payment options, integrating a payment gateway with your website, or accepting newer forms of contact-less payments (Apple Pay, Google Pay, and so on).
This is really an issue of matching the payment options you want to provide with the payment processor (and not the other way around). Fortunately, you’ll find yourself spoiled for choice. You’ll find processors that specialize in just about every aspect of the payment card industry—from traditional storefront processing to mobile payment options to online payment options and more.
- Payment Security
If you’re going to accept credit card payments, your business practices have to comply with the PCI Data Security Standard (PCI DSS).
These standards are set by the PCI Security Counsel, and they deal with fraud prevention and detection (and the processes for dealing with security issues when they arise). As a merchant accepting credit card payments, you’ll be required to complete a Self-Assessment Questionnaire (SAQ) regarding your compliance each year.
Any payment processor worth its salt will PCI Compliant, which means it provides the necessary security measures (such as tokenization technology) to keep your and your customers’ data secure. If you discover that a particular payment processor isn’t PCI Complaint, move on.
- Seek Out References & Reviews
It’s easy enough to find reviews online for just about every credit card processing company. However, when you read those reviews (as you should!), don’t trust everything you read. People tend to leave online reviews when they’re either really happy or really upset, so it’s best to search for patterns of complaints instead of isolated grievances when evaluating a particular credit card processing company.
Moreover, with traditional merchant account providers, you might also ask the company to provide individual customer references (and if they refuse, move on!). You may be applying for merchant services, but in a sense the company is also applying for your business.
- Customer Support
This is a big one. Saving a little money on lower processing fees won’t mean much if you can’t easily resolve problems that come up along the way (and problems will arise).
If your account gets frozen, is there a number to call? Does the company have an in-house customer support team? Do they even list a customer service phone number on their website?
And don’t be afraid to test the company’s customer support. Find the number (was it easy to find?). Call the number (how long did it take to get through—did you get through at all?). Send them an email with a list of questions (did they respond with thoughtful answers? Did they respond at all?).
The Key Takeaway
The card payment industry is controlled by massive corporations. It’s designed mainly for the benefit of banks and big businesses like huge retail chains with the clout to negotiate the best rates and terms. This means most businesses that want to accept credit card payments have to be smart. Otherwise, you’ll find yourself in a mess of bad contracts, expensive equipment, and high fees that seem to get higher the less money you make.
The key to moving forward is setting aside any vague notions of the “best payment processor” (no such thing exists) and do the due diligence necessary to decide which payment processor is right for your business. This means knowing what you want to accomplish now and knowing what you want to accomplish in the near future. Clearly establishing the type of services or goods you’re selling, estimating your likely average ticket size, estimating your monthly sales volume, and deciding which payment options (storefront, mobile, online, etc.) are all important steps to choosing the right payment processor for your business.
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